IT seemed so straight-forward in 2011 when David Cameron welcomed the report by Andrew Dilnot into long-term care costs.

Currently the system penalises those who have planned ahead for old age[GETTY - Pic Posed By Model]

Residents would have to pay a maximum bill of between £25,000 and £50,000. Once their bills had reached that cap – a level that Dilnot settled on because the insurance industry would be able to provide policies to cover a bill of that size – the rest of the bill would come out of general taxation.

The reforms promised to put an end to the iniquitous situation where one care home resident has to sell his or her home and run down savings while a resident in the next bed who frittered away earnings and never saved a penny is provided with the same care at taxpayers’ expense.

It is a good job for the Government that political promises are not subject to advertising standards legislation. If they were ministers might find themselves in the dock.

Not only has the Government’s Care Bill raised the promised cap to £72,000 but it seems to be a cap that covers only half the potential cost.

We are heading back to the reckless last years of the boom when British households were saving virtually nothing

According to a report into the new system by the Institute and Faculty of Actuaries most people with savings will have spent about £140,000 on care costs before the Government starts to pay a penny towards their care.

The reason is that the £72,000 cap only applies to nursing charges: the cost of getting the elderly into and out of bed, getting them dressed etc. It doesn’t apply to what are known as “hotel costs”: the cost of food and a room.

By the time you have paid £72,000 in nursing costs the institute calculates a typical resident will have paid nearly another £70,000 on other costs.

There is one good aspect to the reforms: care home residents will be allowed to keep the first £27,000 of their savings before being ask to pay care home bills compared with £23,500 now. If they are homeowners their property, combined with other assets, will have to be worth £118,000 before it has to be sold to meet care costs.

But many people will still have to sell their homes. The £72,000 cap will only make a difference to eight per cent of male care home residents and 15 per cent of female residents.

The main purpose of the cap seems to be to protect the assets of wealthy people who own an estate of several hundred thousand pounds or more. As with so much that emanates from this Government the people who lose out are those in the middle. Those who are too well-off to have their bills met by the state but not so well-off that they will have much in the way of savings left by the time they reach the cap.

It is easy to scoff at people who moan about having to sell their homes to pay care home bills. Young people struggling to get on the housing ladder can feel rightly irked by the idea of property lying empty while its owner resides in a care home at taxpayers’ expense. But that ignores the moral hazard of the system, which hugely discouraged saving.

If you are in the early years of your retirement or if you are in the latter years of your working life you have a choice: do you put money aside to make your old age more comfortable or do you fritter your money on high-living now in the expectation that the taxpayer will pick up the tab for your care in your final years?

In several ways government policy seems to point people towards the latter option. Interest rates are rock-bottom giving savers a pitiful return. Little has been done to prevent reckless behaviour by banks meaning that savers still have to face the prospect of losing money in a banking collapse (if they have more than £80,000 in a single bank). And then there are care home costs. People who are paying for their own care are subsidising those who are not.

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According to the charity Independent Age it costs an average of £563 per week to provide a place in a care home. The homes, however, are charging “self-funders” £636 per week while local authorities are being charged only £507 a week. The Government has done nothing to right this wrong. No wonder fewer and fewer Britons seem to be bothering to save.

In 2009 we were saving an average of nine per cent of our disposable incomes. By last year that was down to five per cent. The median UK household has just £5,000 in the bank, £3,600 less than the average German household and £14,000 less than the average Chinese.

We are heading back to the reckless last years of the boom when British households were saving virtually nothing and banks were forced to turn to the international credit markets to borrow money. We know what happened next: the credit markets dried up, banks found themselves unable to borrow and were forced to seek a bailout.

The more the Government undermines the case for saving the bigger the demand for welfare. Eleven per cent of British households have no savings whatsoever. One little jolt to their finances – a broken washing machine or delayed wages – and they are driven to food banks, loan-sharks and benefit offices.

Of course a care fee cap costs money. The Treasury estimated that the Dilnot reforms would cost an initial £2.5billion a year but in the longer term the cost of giving us a huge disincentive to save for our old age will be far higher.